Part1 principlesandpractices1

Principles and practices1

1 Defining microinsurance

Low-income persons live in risky environments, vulnerable to numerousperils, including illness, accidental death and disability, loss of property dueto theft or fire, agricultural losses, and disasters of both the natural and man-made varieties. The poor are more vulnerable to many of these risks than therest of the population, and they are the least able to cope when a crisis doesoccur.

Poverty and vulnerability reinforce each other in an escalating downwardspiral. Not only does exposure to these risks result in substantial financiallosses, but vulnerable households also suffer from the ongoing uncertaintyabout whether and when a loss might occur. Because of this perpetual appre-hension, the poor are less likely to take advantage of income-generatingopportunities that might reduce poverty.

Although poor households often have informal means to manage risks,informal coping strategies generally provide insufficient protection. Manyrisk-management strategies, such as spreading financial and human resourcesacross several income-generating activities, result in low returns. Informalstrategies for coping with risk tend to cover only a small portion of the loss,so the poor have to patch together support from a variety of sources. Eventhen, informal risk protection does not stand up well against a series of perils,which unfortunately is a situation often experienced by the poor. Before thehousehold has a chance to fully recover from one crisis, they are struck byanother.

Microinsurance is the protection of low-income people against specificperils in exchange for regular premium payments proportionate to the likeli-hood and cost of the risk involved. This definition is essentially the same asone might use for regular insurance except for the clearly prescribed targetmarket: low-income people. However, as is demonstrated in this chapter andthroughout this book, those three words make a big difference.

1.1 What is insurance for the poor?Craig Churchill

The author wishes to thank the following persons for their useful feedback and suggestions: Bernd Balkenhol (ILO), Felipe Botero (Metropolitan Life), Alexia Latortue and Aude deMontesquiou (CGAP), and Gaby Ramm (consultant).

How poor do people have to be for their insurance protection to be con-sidered micro? The answer varies by country, but generally microinsurance isfor persons ignored by mainstream commercial and social insuranceschemes, persons who have not had access to appropriate products. Of par-ticular interest is the provision of cover to persons working in the informaleconomy who do not have access to commercial insurance nor social protec-tion benefits provided by employers directly, or by the government throughemployers. Since it is easier to offer insurance to persons with a predictableincome, even if it is a small sum, than to cover informal economy workerswith irregular cash flows, the latter represent the microinsurance frontier.

Microinsurance does not refer to the size of the risk carrier, althoughsome microinsurance providers are small and even informal. There are, how-ever, examples of very large companies that offer microinsurance, such AIGUganda, Delta Life in Bangladesh and all insurance companies in India.1

These large insurance providers have a product or product line that is appro-priate for low-income persons.

An important aspect of microinsurance, explored in detail in Part 4, isthat it can be delivered through a variety of different channels, includingsmall community-based schemes, credit unions and other types of micro-finance institutions, as well as enormous multinational insurance companies.In fact, Allianz, one of the largest insurance companies in the world, hasrecently launched an initiative with the United Nations Development Pro-gramme (UNDP) and the Gesellschaft für Technische Zusammenarbeit(GTZ) to provide insurance to the poor in India and Indonesia.

Microinsurance also does not refer to the scope of the risk as perceived bythe clients. The risks themselves are by no means “micro” to the householdsthat experience them. Microinsurance could cover a variety of different risks,including illness, death and property loss – basically any risk that is insur-able.2 This book, however, focuses primarily on life and health insurance asdemand research across many countries repeatedly identifies illness anddeath risks as the primary concern of most low-income households (seeChapter 1.2).

Often people use the term insurance loosely to refer to general risk-pre-vention and -management techniques. For example, savings set aside foremergency purposes might be referred to as an insurance fund. This book,however, uses a narrower definition in which microinsurance, like traditional

13What is insurance for the poor?

1 As described in Chapter 5.2, Indian insurance companies are required to allocate a percentage oftheir insurance portfolio to persons in the “rural and social sectors”, which in practice means low-income households. Consequently, all Indian insurers are involved in microinsurance in one way oranother, so many interesting microinsurance innovations are coming from India.

2 Chapters 1.2 and 2.1 describe the characteristics of insurable risks.

insurance, involves a risk-pooling element. Those in the risk pool who do notsuffer a loss during a particular period essentially pay for the losses experi-enced by others. Insurance reduces vulnerability as households replace theuncertain prospect of losses with the certainty of making small, regular pre-mium payments. Yet this risk-pooling function means that insurance is amuch more complicated financial service than savings or credit.

Since microinsurance is just one of several risk-management tools avail-able to low-income households, organizations truly concerned about helpingthe poor to manage risks should assess whether the provision of microinsur-ance is the most appropriate response. For risks that result in small losses, forrisks with high predictability of occurring or high frequency of occurrence,savings and emergency loans would be more appropriate risk-managingfinancial services. Savings and credit are also more flexible than insurance asthey can be used for a variety of different risks (and opportunities). Insur-ance, on the other hand, provides more complete coverage for large lossesthan poor households could provide on their own. For these larger risks, par-ticipating in a risk pool is a more efficient means of accessing protection thanif households try to protect themselves independently.

One must be careful not to overstate the developmental effect of insur-ance. On its own, insurance cannot eliminate poverty. Yet if it is available topoor women and men along with other risk-management tools, health andlife insurance for the poor can make a valuable contribution to achieving theMillennium Development Goals (see Box 1).

Box 1 Microinsurance and the MDGs

The Millennium Development Goals, established by the United Nations in2000, provide more than 40 quantifiable indicators to assess the progressmade toward global economic and social development by 2015. The MDGsserve as a development framework, helping to focus the attention of policy-makers, donors and development practitioners on the most critical objec-tives.

Certain MDGs would be more achievable if insurance were widely avail-able among low-income households, including the following targets:

– Halve the proportion of people whose income is less than one dollar per day

– Halve the proportion of people who suffer from hunger– Ensure that children everywhere, boys and girls alike, will be able to

complete a full course of primary schooling– Eliminate gender disparity in primary and secondary education – Reduce by two-thirds the under-five mortality rate

14 Principles and practices

– Reduce by three-quarters the maternal mortality ratio– Halt and begin to reverse the spread of HIV/AIDS– Halt and begin to reverse the incidence of malaria and other major diseases

For example, insurance can help reduce the proportion of people who sufferfrom hunger and whose income is less than one dollar per day. While devel-opment experts tend to focus on efforts to promote economic developmentas a strategy to achieve these targets, they have to recognize that gains canquickly be lost when vulnerable households experience a loss or crisis. It isnecessary to complement efforts to boost productivity with correspondingefforts to provide protection.

Perhaps even more directly, microinsurance can help address the health-related objectives of reducing child mortality, improving maternal health andcombating HIV/AIDS, malaria and other diseases. Health microinsuranceschemes typically provide immunizations, train birth attendants and make itpossible for women to afford transportation and hospitalization for difficultbirths.

Some microinsurance schemes provide valuable information and resourcesfor risk prevention. By providing education about risks and promoting goodhealth habits, these schemes can reduce incidents of disease and extend lifeexpectancy (see Chapter 3.9).

Interestingly, microinsurance can also assist in promoting gender equalityand empowering women (see Chapter 2.4). If insurance can help protect vul-nerable households from falling back or further into poverty, they will be lesslikely to have to choose which child to send to school. Furthermore, long-term savings and insurance policies enable the poor to accumulate assets thatcan be used to pay for education, for daughters as well as for sons.

2 The two faces of microinsurance

There are two main varieties of microinsurance – one focused on extendingsocial protection to the poor in the absence of appropriate governmentschemes and the other offering a vital financial service to low-income house-holds by developing an appropriate business model that enables the poor tobe a profitable (or sustainable) market segment for commercial or coopera-tive insurers.

Yet these two varieties have much in common. One might considermicroinsurance like Janus, the ancient Roman god of gates and doors, alsothe god of beginnings, who is depicted with two faces, yet one body (Figure1). Regardless of whether one is looking at microinsurance from a social-pro-tection or a market-based approach, the body of the insurance scheme, its


basic operations, will be largely the same. Hence a book on microinsuranceoperations must draw lessons and experiences from both.

Figure 1 Janus: The two faces of microinsurance

2.1 Deepening access to insurance services: A new market

The guru behind the articulation of the “new market” perspective is C.K.Prahalad (2005), who illustrates in his book The fortune at the bottom of thepyramid that the “private sector, in its desire to … gain market coverage, willinvent new systems depending on the nature of the market”. Prahalad identi-fies the more than four billion persons living on less than US$2 per day as amarket opportunity if the providers of products and services, includingmultinational corporations, innovate new business models and create low-income consumers.

This thinking is certainly not new to those involved in microfinance,where commercialization has been underway since 1992 when the Bolivianmicrofinance NGO Prodem created BancoSol, the first commercial bankdedicated to serving the low-income market. The creation of BancoSol start-ed a revolution that has inspired at least 39 other NGOs to create regulatedfinancial institutions (Fernando, 2004) and numerous commercial banks andfinance companies to reach “down market”.

Besides microfinance, Prahalad also draws examples from other indus-tries, including construction, consumer goods and healthcare. Based on casestudies of successful innovations, Prahalad identifies common principles tobe considered when innovating for the bottom of the pyramid (BOP). Eventhough he does not analyse insurance case studies, Prahalad’s “Twelve Princi-ples of Innovation for BOP Markets” are remarkably applicable to the provi-sion of microinsurance (see Box 2).


A new market for insurers

Social protection for workers in the informal economy

Box 2 Applying Prahalad’s “Twelve Principles of Innovation for BOP Markets”to microinsurance

1. New understanding of price-performance relationshipObviously, the poor cannot afford to pay high prices, but that does not meanthat they deserve poor-quality products. For microinsurance, it could evenbe argued that the low-income market requires a better-quality product (e.g.quick claims settlements, few if any claims rejections) to overcome theirapprehension about paying up-front for some undetermined future benefit.Prahalad also contends that the BOP market is surprisingly brand-conscious,something that microinsurers must keep in mind as they strive to secure themarket’s trust and confidence.

2. Combine advanced technologies with existing infrastructureAlthough this is just beginning to emerge in microinsurance, several microfi-nance institutions are experimenting with technologies, (including ATMswith biometrics, smartcards, palm pilots and point-of-sale devices) toenhance efficiency and productivity. Microinsurers will undoubtedly followsuit.

3. Scale of operationIn a BOP business model, the basis for returns on investment is volume.Even if the per unit profit is minuscule, when it is multiplied across a hugenumber of sales, the return can become attractive to shareholders. Thisattribute is a perfect fit for insurance and the Law of Large Numbers, where-by actual claims experience should run much closer to the projected claimswhen the risk pool is larger. When projections can be estimated with a highdegree of confidence, then the product pricing does not have to include alarge margin for error, making it more affordable for the poor.

4. Eco-friendlyPrahalad notes that the resources associated with products in developedcountries would be unsustainable if used for the enormous BOP market.Consequently, all innovations must minimize packaging and consider theimpact of the product on the environment. This principle may not be direct-ly applicable to microinsurance, however there is a connection. Many cata-strophic risks to which the poor are vulnerable are associated with climatechange.


5. Requires different functionality Products and services for the BOP market cannot just be scaled down or lessexpensive versions of traditional products. With microinsurance, for exam-ple, insights into how low-income households might use an insurance payoutillustrate key differences with the conventional insurance market. For exam-ple, instead of a lump sum of cash, the poor might prefer in-kind benefits(e.g., funeral service, groceries) possibly spread over a period of time.

6. Process innovationWhen designing a product for the BOP market, it is necessary to adapt theprocess as well as the product, taking into account the limited infrastructuretypically available for the poor. In microinsurance, for example, one mustrecognize that the premium is not the only expense. The indirect costs ofaccessing and using that product, including transportation and the opportu-nity costs of lost wages, may be much higher than the actual cost.

7. Deskilling workService industries are naturally labour-intensive; those focusing on the BOPmarket are even more so, given the scale of operations. Since labour costs canrepresent over half of the total operating expenses, one strategy to containcosts is to simplify the operations so that products can be sold and servicedby less expensive workers. Such an approach is quite appropriate formicroinsurance because the customers also want simple, easy-to-understandproducts.

8. Significant investments in educating customersPrahalad is explicit about the importance of creating BOP consumersthrough education and the raising of awareness, using innovative mecha-nisms to reach persons in “media dark zones”. This has also been the experi-ence of microinsurers which need to explain to their clients how insuranceworks and how they will benefit from it.

9. Designed for hostile conditionsThe products and services designed for the BOP market must take into con-sideration the unsanitary conditions and limited infrastructure (e.g. electrici-ty blackouts, poor water quality). For microinsurance providers, thisinvolves investing in loss-prevention measures such as promoting low-riskbehaviour, water purification and hygiene in order to reduce claims forhealth and life insurance.


10. User-friendly interfacesThe heterogeneous BOP market speaks a myriad of languages with a varietyof different literacy levels. Serving this market requires careful considerationto make it easy for poor households to use the service. For microinsurance,the application form should be short and perhaps completed by the sales per-son. More challenging is the simplification of claims documentation to makeit easy for clients to access benefits while protecting insurers from fraud.

11. DistributionOne of the great challenges in serving BOP consumers is to get the productto the market; yet, insurance companies are particularly weak at distribution.The main solution to this problem is to collaborate with another organiza-tion that already has financial transactions with low-income households sothe insurer can leverage existing infrastructure to reach the poor.

12. Challenge the conventional wisdomIn sum, to serve the low-income market, insurers have to think differently –about customers’ needs, product design, delivery systems and even businessmodels. There is a viable market out there if insurers are willing to learnabout that market and develop new paradigms for serving it.

To understand clearly how to develop new business models for microin-surance, it is necessary to assess why the current insurance business modelsdo not reach the poor. Although the insurance industry is beginning to noticethe vast under-served market of low-income households, insurers haveencountered numerous obstacles that need to be overcome if they are to offermicroinsurance on a large scale.

Besides the problems associated with high transaction costs and inappro-priate distribution systems identified in Box 2, the products generally avail-able from insurers are not designed to meet the specific characteristics of thelow-income market, particularly the irregular cash flows of households withbreadwinners in the informal economy. Other key product design issuesinclude appropriate insured amounts, complex exclusions and indecipherablelegal policy language, all of which conspire against effectively serving thepoor.

It is generally assumed that low-income men and women are more vul-nerable to risks than the not-so-poor; however, insurers generally do nothave data to interpret the vulnerabilities of the poor. To address such a prob-lem, insurers may build in a hefty margin for error and then make adjust-ments once the claims experience starts rolling in. However, if insurers build


in a cushion on top of the high administrative costs required to serve the low-income market, premiums may not be affordable.

Insurers assume, rightly or wrongly, that the low-income market cannotafford insurance. Interestingly, when insurance first became widespread inthe late 19th century, it was seen as a poor man’s financial service. Thewealthy did not need insurance because they could essentially self-insure.Somewhere along the way, as insurance became more sophisticated and thewealthy recognized their vulnerabilities, the perceptions reversed.

Insurers do not have the right mechanisms to control certain insurancerisks, such as adverse selection and fraud, among the low-income market.For example, the claims documentation methods and verification techniquesused to ensure that someone with a US$100,000 life policy is not defraudingthe insurer are inappropriate for a US$500 policy.

A major challenge in extending insurance to the poor is educating themarket and overcoming its bias against insurance. Many are sceptical aboutpaying premiums for an intangible product with future benefits that maynever be claimed – and they are often not too trusting of insurance compa-nies. Creating awareness about the value of insurance is time-consuming andcostly. To be fair, the bias goes in both directions. The people who work forinsurance companies are usually unfamiliar with the needs and concerns ofthe poor. Similarly, the culture and incentives in insurance companies rewardsalespersons for focusing on larger policies and more profitable clients andportray the idea of selling insurance to the poor as ridiculous.

This low-income market has massive potential if insurers can addressthese issues with efficient and effective innovations. While these obstacles aresignificant and daunting, they can be overcome – they are being overcome –by a number of formal and informal insurers around the world that aredeveloping new techniques to reach a vast under-served market.

2.2 Providing social protection for informal workers

Even with significant innovations to insurance business models, productdesigns and delivery channels, it is clear that not everything or everyone isinsurable based on market principles. Nor should that be the case. Indeed,governments have a critical responsibility to provide social protection totheir citizens.

Social protection is the other face of microinsurance. It generally includesa variety of government policies and programmes to reduce poverty and vul-nerability by diminishing people’s exposure to risks and enhancing theircapacity to protect themselves. Social protection refers to the benefits thatsociety provides for its members, including:


– unemployment and disability benefits,– universal healthcare,– maternity benefits,– old-age pensions,– protection for children and the disabled.

However, more than half the world’s population is excluded from any typeof social security protection, including contribution-based schemes and tax-financed social benefits. In some parts of the world, the situation is particu-larly severe. In sub-Saharan Africa and South Asia, the coverage of statutorysocial security is estimated at 5 to 10 per cent of the working population(ILO, 2001).

Developing countries face major challenges in connection with providingcomprehensive social protection. The vast majority of persons work in theinformal economy, so there are no effective mechanisms to reach them sys-tematically. Since they are self-employed or working in informal businesses,there is no formal employer to make contributions to pension, unemploy-ment or healthcare schemes. Yet, the working poor cannot afford the full costof social security schemes. At the same time, governments in many develop-ing countries do not have the resources to create sufficient infrastructure (e.g.healthcare facilities) nor pay for the recurring expenses associated with socialprotection schemes.

Microinsurance as a social protection mechanism strives to fill the gap toprovide some coverage for the excluded – which would be even more effec-tive if it were supplemented by government schemes to facilitate a redistribu-tive effect. In the absence of formal social protection, microinsuranceresponds to an urgent need while not absolving governments of their respon-sibilities. Indeed, as described in Chapter 1.3, microinsurance can createdelivery mechanisms to extend government programmes (and subsidies) tothe informal economy, and in so doing integrates the informal and formalsocial protection systems.

Consequently, regardless of which face of Janus one uses to view micro-insurance, the intention is to reduce the vulnerability of the working poor byenticing the public (social protection) and the private sector (new market), or both, to do what neither has so far been particularly effective in doing:providing insurance to the poor. Indeed, since these two faces have the samehead, it is reasonable to explore areas of convergence to create alternativemodels or systems of protecting the poor, such as public-private partner-ships, mutuals and cooperatives, and government incentives to correct marketfailures.


3 What a difference three words make

The operational aspects of extending insurance to low-income householdsare largely the same, whether one is approaching it from a market or social-protection perspective. The following key characteristics illustrate howinsurance for the poor may differ from both conventional insurance andmainstream social-protection programmes:

Relevant to the risks of low-income householdsOf course coverage should be linked to the greatest areas of vulnerability forlow-income households, but often what is available from insurers or socialsecurity administrations does not really address the needs of the poor. Canunemployment insurance really be made relevant for casual day labourers?Do commercial insurers really know what risks poor men and women aremost concerned about, what keeps them awake at night?

As inclusive as possibleWhile insurance companies tend to exclude high-risk persons, microinsur-ance schemes generally strive to be inclusive. Such an approach makes sensewhen microinsurance is seen as an extension of government social protectionschemes. Indeed, to achieve the social mission of microinsurance, it is neces-sary to provide protection when vulnerable households need it the most.However, is inclusion feasible for market-based microinsurance? Since thesums insured are small, the costs of identifying high-risk persons, such asthose with pre-existing illnesses, may be higher than the benefits of excludingthem in the first place. Plus, if microinsurance schemes can reach the tremen-dous volumes of customers required to achieve the MDG targets, manyexclusions and restrictions can be just administrative nuisances that under-mine efficiency rather than important insurance risk control tools.

Affordable premiumsAt the end of the day, microinsurance schemes have to be affordable for thepoor, otherwise they will not enrol in the scheme, nor benefit from the cov-erage. Various strategies could make microinsurance affordable, includinghaving small benefit packages, spreading premium payments over time tocorrespond with the household’s cash flow and supplementing premiumswith subsidies from governments. From the social protection perspective, theredistribution function, from rich to poor, theoretically helps to make contri-butions affordable for the poorest. In the market model, insurers may bewilling to accept low short-term returns, or even losses, to develop the market.


Grouping for efficienciesGroup insurance is more affordable than individual coverage, but how doesone find groups of people in the informal economy? Even though the infor-mal economy is sometimes known as the disorganized sector, there aregroupings out there that could be used, such as women’s associations, infor-mal savings groups, cooperatives, small business associations and the like.Some microinsurers use these groups more effectively than conventionalinsurers by enlisting the support of the groups in member selection andreducing insurance risks such as over-use and moral hazard.

Clearly defined and simple rules and restrictionsA CEO of a major United States insurance company once admitted that evenhe did not understand his homeowner’s insurance policy. Insurance contractsare generally full of complex conditions, conditional benefits, written inlegalese that even lawyers struggle to discern. Although the rationale for thefine print may be consumer protection, if the consumers do not understandwhat is written, its very object is defeated. Moreover, its content can give theinsurance company an excuse not to pay a claim. For a host of reasons,microinsurance has to be kept as simple and straightforward as possible sothat everyone has a common understanding of what is and is not covered.

Easily accessible claims documentation requirementsThe process for accessing benefits, from social security departments or insur-ance companies, tends to be so arduous that it discourages all but the mostpersistent claimants. Such obstacles are inappropriate for low-income house-holds that cannot afford to spend days away from work, paying “unofficialfees” to access official documents. While controls have to be in place to avoidfraudulent claims, for microinsurance to be effective, it has to be easy forlow-income households to submit legitimate claims.

Strategies to overcome the wariness of customersLastly, microinsurers must have effective strategies to overcome the appre-hension of low-income households as regards insurance. One of the primaryways to achieve that objective is through client education, to raise awarenessamong prospective policyholders about how insurance works and how it canbenefit them. Equally important, however, is upholding promises and fulfill-ing obligations, and creating a culture of insurance among the poor. Formicroinsurance to build the confidence of the market, it has to avoid many ofthe common criticisms of insurance providers, who are seen as quick to takeone’s money, but slow to pay it out. Indeed, microinsurance needs to develop


systems to pay benefits expeditiously, to minimize or avoid claims rejectionsand to provide a quality of service that earns the trust of a wary market.

For both the social protection and market perspectives, insuranceschemes for the poor have to find a way of balancing three competing objec-tives: 1) providing coverage to meet the needs of the target population, 2)minimizing operating costs for the insurer and 3) minimizing the price(including the transaction costs for the clients) to enhance affordability andaccessibility. These represent difficult choices that are best answered byinvolving those who ultimately benefit from the coverage to choose betweenthem.

In summary, microinsurance must be designed to help poor people man-age risks. With that overarching objective forging a unique mindset, micro-insurance clearly emerges as quite distinct from mainstream insurance andsocial protection schemes. Perhaps when they first emerged, both social andcommercial insurance were also founded on the ideal of protecting the poor.For example, some of today’s large insurance companies began in the 1800sas mutual protection schemes among factory workers. Nevertheless, over theyears, efforts to prevent fraud and misuse have created a maze of bureau-cratic rules and requirements that undermine their effectiveness and theirappropriateness for the poor. In addition, for the market-based approach,efforts to maximize shareholder returns have led them away from their ori-ginal clientele in search of more profitable customers.

Indeed, microinsurance can be described as an insurance “back to basics”campaign, to focus on the risk-management needs of vulnerable people, andto help them manage those risks through the solidarity of risk pooling.Although not all microinsurance schemes are true to these values, the closerthey can come, the more likely they will benefit the people who need themthe most.


Risk is ever present in the lives of the poor. Faced with shocks, poor peopledraw on their financial, physical, social and human assets to meet the result-ing expenses. In the absence of precautionary or ex ante risk-managementinstruments, most are forced to rely on a range of options after the fact or expost. When a crisis occurs, a common coping strategy is to borrow from themoneylender or microfinance institution; others might ask friends and rela-tives to help. Few have access to formal insurance services.

Poor people struggle endlessly to improve their lives. It is a slow andgradual process marked by tentative advances. Continually bombarded withfinancial pressures, low-income households find that shocks can easily erodetheir hard-earned gains. The result is that their trajectory out of poverty fol-lows a zigzag route: advances reflect times of asset building and incomegrowth; declines are the result of shocks and economic stresses that oftenpush expenditure beyond current income (Figure 2). The role of microinsur-

1.2 The demand for microinsuranceMonique Cohen and Jennefer Sebstad

The authors appreciate the insights and comments of Frank Bakx (Rabobank Foundation), Michal Matul (Micro Finance Center) and Michael McCord (MicroInsurance Centre).

Figure 2 Impact of shocks on household income and assets

Source: Adapted from McCord, 2005.

Wealthy

Non-poor

Vulnerable non-poor

Moderate poor

Extreme poor

Destitute

Safety net

Shocks With risk-managementoptions

Without risk- managementoptions

Poverty line

TIME

ance, like any effective risk-management instrument, is to temper thesedownturns, which are major impediments to escaping poverty. Confrontedwith a shock, poor people usually patch together a variety of resources,including formal and informal credit and savings, and seeking out additionalwork or income-generating opportunities to meet their expenses. Under-standing these risk-management strategies is a starting point for thinkingabout the demand for insurance by the poor. This chapter explores the risksto which low-income people are vulnerable, analyses their primary means ofcoping with or managing these risks, and provides insights into how insur-ance could enhance the ability of the poor to deal with risks.

1 Managing risk

1.1 Shocks and stress events

Vulnerability is closely associated with poverty and can be described as theability of individuals and households to deal with risk.1 The demand formicroinsurance is directly related to vulnerability; it grows out of the risksand risk-management strategies of low-income households. Research on theimpact of risk events and on how poor people cope with shocks helps illumi-nate the demand for insurance.

Risk comes in many forms, for example illness, death of a loved one, fireor theft. These shocks occur frequently and create pressures on householdcash flow that exacerbate the ever-present stress of meeting regular expenses,such as food, rent and school fees. When financial pressures exceed the cash-flow capacity of the household, people must seek finance from outsidesources. In some circumstances, microinsurance could be an option for fillingthis gap.

The difference between microinsurance and conventional insurancepolicyholders is that the former are poorer, have fewer financial reserves andhave incomes that fluctuate considerably throughout the year. The poor aremore vulnerable to such shocks because they have fewer resources not onlyto meet the immediate costs of the shock, but also the secondary expensesincurred in getting back on their feet (Box 3). Once their reserves are deplet-ed, low-income households are forced into increasingly reactive modes ofbehaviour. They respond to each crisis with increasingly stressful copingmechanisms (Figure 3). The challenge for microinsurance is to turn reactiverisk-management practices into proactive ones.


1 Risk is defined as the chance of a loss or a loss itself.

Box 3 Impact of shocks on the rich and poor in Viet Nam

Shocks that are minor for the non-poor can be devastating for those belowthe poverty line. In Viet Nam, the poor and rich can experience the same ill-nesses. However, compared to the wealthy, the poor tend to get sick moreoften, and therefore the costs are higher both in absolute terms and relativeto household income. They also face difficult trade-offs: high health costs canalso leave people with no money to send their children to school.

Source: Adapted from Tran and Yun, 2004.

1.2 Prioritizing risks

While across countries and in different markets within countries people pri-oritize risk differently, low-income households consistently identify the lossof a household income earner or sickness of a family member as their greatestconcerns (Table 2). Disability is also important but often subsumed underhealth. These shocks include both those that can be anticipated and thosethat cannot. Fortunately, many of the prevalent risks lend themselves to pro-tection through insurance.

27The demand for microinsurance

Priority risks in selected countries

Country Priority risk

Uganda Illness, death, disability, property loss, risk of loan

Malawi Fear of death, especially in relation to HIV/AIDS, food insecurity, illness, education

Philippines Death, old age, illness

Viet Nam Illness, natural disaster, accidents, illness/death of livestock

Indonesia Illness, children’s education, poor harvest

Lao P.D.R. Illness, livestock disease, death

Georgia Illness, business losses, theft, death of family member,retirement income

Ukraine Illness, disability, theft

Bolivia Illness, death, property loss including crop loss in ruralareas

Sources: Enarson and Wirén, 2005; Matul, 2004; Matul and Tounitsky, 2006; Mekong Economics, 2003; McCord, 2005; McCord et al., 2005b; Sebstad and Cohen, 2001.

Table 2

While the dominance of illness is not surprising, it is easy to lose sight ofits double impact in terms of the loss of income and added expenses. Forfamilies with sick children, small expenses can quickly mount up and havehuge financial impact. Accidents, as well as chronic illness such as malariaand HIV/AIDS, require extremely large sums. These overwhelming financialpressures frequently fall on women, many of whom assume primary respon-sibility for the welfare of their families.

Figure 3 The impact of risks

Source: Cohen and Sebstad, 2005.


Immediate impact Response Longer-term impact

Risk event

· Income loss· Asset loss· Need for lump sum

of cash

Low stress· Modify consumption· Improve family budgeting· Call in small debts· Draw on informal group-

based insurance· Draw on formal insurance

· Reallocate householdresources

· Reduce unnecessaryexpenditures

· Temporary change inlifestyle

· Depleted financial reserves· Indebtedness – claim on

future income flow· Long working hours/

Business loss· Interference with family

life· Increased social

obligations

· Loss of productivecapacity

· Loss of income· Depleted assets· Loss of access to financial

markets· Untreated health problems· Social isolation

Medium stress· Use savings· Borrow from formal or

informal sources· Diversify income sources· Mobilize labour· Migrate to work· Get help from friends· Shift business to residence

High stress· Sell household assets· Sell productive assets· Let employees go· Run down business stock· Default on loans · Drastically reduce

consumption· Divest of family ties· Take children out of

school to work

2 The importance of understanding the demand for microinsurance

Initial forays by insurance companies into the low-income insurance markethave focused on downscaling existing formal insurance products. In theabsence of market research, microinsurance providers have given limitedattention to the match between products and consumer preferences. Theresult has been the supply of products that are not always well suited to themarket. With this have come low persistence and renewal rates.

Improved understanding of demand enhances the design of appropriateproducts and identifies the steps that should be taken to ensure the adoptionof these products by the poor. Market research improves the uptake of theseunfamiliar services by determining what types of insurance low-incomegroups need, what types they can afford and what products it is feasible todeliver.

The range of topics for microinsurance demand research can be broad,depending on the intended use of the findings and the time and resourcesavailable. Research can be carried out at three levels, each dealing with a par-ticular aspect of market demand: 1) understanding client needs, includingtheir current risk-management behaviour, 2) product-specific research and 3)an analysis of the overall potential market.

The first level focuses on understanding client needs and what risks itmakes sense to insure for different groups among the poor. It involvesresearch on:

– key risks facing poor people,– the impact of these risks,– existing coping mechanisms,– the effectiveness of the coping mechanisms,– the role microinsurance (or other financial services) can play.

This level of research emphasizes current risk-management behaviour. Infor-mation on current practices and financial strategies households use to preparefor and respond to shocks helps to identify the vulnerabilities of the targetmarket. A focus on existing coping mechanisms, and specifically group-based informal insurance mechanisms that involve risk pooling, can help toidentify positive attributes of informal insurance systems that could be incor-porated into the design of more formal microinsurance products. Under-standing coping strategies can help to separate out risks that might be betteraddressed through savings and emergency loans. This type of research trans-lates core needs into actual products by generating information that can beuseful in identifying appropriate product attributes, such as the type and


amount of coverage, exclusions, delivery models, premium amounts, premi-um payment options, premium collection procedures and claims procedures.

The second level, product-specific research, can be carried out in con-junction with the development and testing of a product prototype and/or theactual delivery of an insurance product. Demand research on existing prod-ucts, best undertaken after a product has been on the market for a while,addresses issues of customer satisfaction and loyalty. The focus is on people’sadoption of the product, generating information that can be used in thedesign, delivery and affordability of new products or the refinement of exist-ing ones. Emphasis is placed on the extent to which products match theneeds, preferences and income capacity of low-income people (Sebstad et al.,2006).

The third level of research addresses the size of the potential market fora particular microinsurance product.2 It estimates the number of potentialpolicyholders in a particular geographic setting with potential demand andthe capacity to pay. Of key importance is segmenting the market by particu-lar types of insurance and estimating the incidence of the risk event for a par-ticular population in a defined geographic location and within a specifiedtime period. This information relates to the financial feasibility of an insur-ance product, the number of subscribers required for the product to be prof-itable, and pricing as well as other dimensions of a product within a market.3

This level can also address current use and knowledge of insurance, attitudestowards insurance concepts and the insurance sector. Research on theseissues helps to determine the potential market over the short and mediumterm. It also identifies those segments of the market that have specific usageand attitude problems with respect to microinsurance. This information canbe used to formulate strategies to attract potential policyholders.

3 Current coping strategies: Strengths and weaknesses

In coping with shocks and stress events, precautionary measures are desir-able but not always possible, especially for low-income households. Optionsfor protecting against risks ahead of time may include:

– diversifying income sources,– building assets by saving money, stocking food and investing in housing and

healthcare,– strengthening social networks,


2 The authors are indebted to Michal Matul for his contribution to this section.3 This includes promotion, positioning, place, people and process.

– participating in reciprocal borrowing and lending systems, welfare associa-tions and other informal group-based insurance systems,

– enrolling in formal insurance or pension schemes or other formal socialsecurity systems,

– managing money well by controlling consumption and maintaining access tomultiple sources of credit.

All of these options are widely used; however, when cash flow is limited,poor households often manage shocks and stress events ex post (see Box 4).

Box 4 Risks and risk management in Malawi

People in Malawi are very much aware that improving the health of individu-als and animals is the best precaution against disease. However, in this verypoor country, the lack of both health and veterinary services and access toappropriate financial services is an obstacle. In addition, Malawians find thatthe lack of transport and poor communications also restrict their capacity tocope with risk.

Source: Adapted from Enarsson and Wirén, 2005.

The options for coping with losses ex post are both extensive and creative.Some long-standing, informal and self-insurance risk-management tools havebeen adapted over the years to respond to new diseases such as HIV/AIDS,new pressures such as the privatization of the health system and changes inthe financial services market. Aspects of each can work for low-incomehouseholds, although the levels of coverage and effectiveness will varydepending on the option. Few low-income households limit themselves toone risk-management instrument. They mix and match various optionsdepending on the risk, the loss and their cash flow (see Box 5).

Box 5 Coping strategies in Viet Nam

In Viet Nam, loans are often used for healthcare. Sales of pigs, importantassets, are often used to pay expenses such as school fees. Cash savings can beimportant, but they are limited. Cash kept at home is risky because of thecontinual pressure on its use. Next in importance is saving in a group, like arotating savings and credit association (ROSCA), even though this is seenprimarily as a precautionary mechanism.

Source: Adapted from Mekong Economics, 2003.


As illustrated in Table 3, both ex ante strategies (precautionary) and expost strategies (managing a loss) for dealing with risk generally involve a mixof intra-household measures (self-insurance) and inter-household, group-based measures (informal and formal insurance). The types and mix of strate-gies an individual or household uses at any given time will reflect its level ofvulnerability. The pros and cons of these risk-management instruments arediscussed below.

3.1 Self-insurance

Self-insurance, which does not have a risk-pooling mechanism, is a commonrisk-management strategy for people at all income levels. For example, eco-nomic stresses that cause a short-term increase in household expenses canoften be mitigated with credit, savings or additional income. Generally thesemechanisms work best in situations where risks have a high probability ofoccurring and cause relatively small losses.

Drawing on savings is less expensive than using credit for expected needs.Yet, this savings strategy also is limited. Many poor households have difficul-ty amassing sufficient funds to manage risks adequately. Those that have sav-


Coping strategy by risk

Coping strategies RisksDeath Health Property

Self-insurance Financial services Financial services Financial servicesMoney lender Current income Current income

Family/friends Sell assetsSell/pledge assets PrecautionaryMoney lender measuresReduced consumption

Informal group- Welfare associations Welfare associations Welfare associationsbased mechanisms (funeral societies) Borrow from Vigilante groups

ROSCAs church groups Hiring of guardsFund raisersROSCAs

Formal insurance Partnerships between Partnerships between Partnerships betweeninsurers and MFIs insurers and MFIs insurers and MFIs

purchase health purchase propertyinsurance insurance

Social protection Health services PoliceDisability compensation

Table 3

ings are reluctant to draw on them as they strive to preserve these hard-earned assets for earmarked purposes, such as investing in a business orbuilding a house (Sebstad and Cohen, 2001). A study in Tanzania found thatmany people with significant savings prefer to borrow rather than draw onthese savings when faced with an unexpected demand (Millinga, 2002). InBolivia, many of the urban poor borrow as an instant response to a crisis.(Velasco and del Granado, 2004). By contrast, in South Africa, savings play akey role in risk management (Bester et al., 2004).

In general, credit is ill suited for larger losses, such as expensive healthcareshocks and catastrophic events that affect large numbers of people at thesame time. Protection against these losses requires other forms of social pro-tection, disaster assistance or public support (Churchill, 2005; Siegel et al.,2001). One area where credit has proved effective in managing risk is throughemergency loans, such as those introduced by CIDR in Mali. A highly popu-lar financial product in rural areas, the funds are tapped to overcome a com-mon hurdle in accessing healthcare, i.e. the need to pay for transport to amedical centre. Ensuring access to multiple sources of microcredit in anemergency is another risk-management strategy, but there are limitations.Clients in the middle of repaying one loan may not be allowed to borrowextra funds from the same source. They are also at risk of assuming moredebt than they can handle (see Box 6).

Box 6 Risk management and over-indebtedness in Georgia

Research from Georgia shows that the most common risk-managementstrategies involve excessive borrowing and the liquidation of householdassets. Over the long run, increasing over-indebtedness and a shrinkinghousehold asset base increases a household’s vulnerability to poverty. This isa particular phenomenon in transition countries where the new poor, slow todevelop their own coping strategies, still expect inefficient governments tohelp them.

Source: Adapted from Matul, 2004.

Borrowing from family and friends is widely acknowledged as a strategyfor meeting unanticipated shocks. However, the amounts of money are usu-ally small and not always available, especially when prospective benefactorsexperience the same crisis. The source of support also comes with expecta-tions of reciprocity, which can create longer-term pressures.

When people respond to a crisis by borrowing, repayments place a claimon future income. If income dips, households may be forced to mobilizelabour (including children), sell assets or go even further into debt. Default-ing on the loan is rarely perceived as a viable option. The poor generally go


to great lengths to maintain their access to microcredit, if only to be assuredaccess to a lump sum in future times of need (Sebstad and Cohen, 2001).

Depletion of assets is a last resort. With it goes the loss of the household’sproductive base and capacity to generate future income. When productiveassets are sold, resuming productive activities is much more difficult andstressful. As observed in Albania, crises often require selling productiveassets and inventory at great discounts to pay expenses and debt. The house-hold is then doubly punished when it seeks the money to repurchase theassets. Repeated shocks combined with depleted reserves to reduce thehousehold’s ability to resume productive activities, recover and cope withfuture risks (Szubert, 2004).

People also self-insure through other precautionary measures. In EastAfrica, shopkeepers invest in burglar bars on windows and night watchmen;alternatively, they sleep in their shops or simply take their inventory homewith them (Cohen and Sebstad, 2005).

3.2 Informal group-based mechanisms

Low-income households in many countries use diverse types of welfare asso-ciations for sharing risk (Table 4). Their underlying basis is reciprocalexchange in times of need. Ethnically or geographically based welfare associ-ations help their members manage cash flow or pool risk. Many are governedby well-defined charters and require payment of dues in return for the rightto access group resources, in cash or in kind, for a specified need.

When a death occurs, welfare associations are particularly adept atresponding quickly. A major weakness can be the limited coverage provided


Examples of informal group-based insurance systems

Country Name of welfare association Function

Uganda Munno mukabi (friends in need) Covering funeral requirementsincluding food for guests andembalming of the body

Philippines Damayan Welfare/burial societies

South Africa Funeral or burial societies4 Emotional support, helping hands

Indonesia Arisans Health insurance

Table 4

4 Funeral or burial societies are distinct from funeral parlours, which deal with the body, and fromfuneral insurance, which provides cash support, although some funeral parlours offer insurance withan in-kind benefit.

by a single burial society; also a series of shocks can deplete its reserves. As aresult, households often belong to multiple associations and incur the hightransaction costs that accompany each membership (see Box 7).

Box 7 Membership in multiple burial societies

In South Africa, people willingly hold numerous policies, because each maybe insufficient or provide different funeral coverage. Membership of numer-ous welfare associations is also common. The first is intended to cover thefuneral costs, the second to provide food for the children and the third one isfor the secondary impacts, to keep food on the table, keep the children inschool and help the household recover.

Source: Adapted from Bester et al., 2004.

Households sometimes fall out of informal group-based funeral societiesin their communities because they are socially excluded or too poor to par-ticipate. In the absence of this support, life insurance is often a more impor-tant need than among those who are not socially or economically excluded.

Informal group-based mechanisms also include ROSCAs and accumulat-ing savings and credit associations (ASCAs), which are used as a way to save.Depending on the size of the cash contribution, they can be useful when arelatively large amount of cash is needed. However, these mechanisms maynot be sufficiently flexible to provide the funds when they are most needed,since members often need to wait their turn. In Indonesia, members facedwith an emergency can apply to take their turn early, but receive only a dis-counted amount (McCord et al., 2005b). In situations where the ROSCAmechanism is not sufficiently responsive to emergencies, however, member-ship of such a group often creates social capital on which the members candraw in times of need.

3.3 Formal insurance

Microinsurance is a new option for low-income households. Designed pri-marily to provide protection for health and death expenses, these new prod-ucts so far have met with varying degrees of success. Poor individuals andhouseholds at or around the poverty line are the primary target market.Those households well below the poverty line are most in need of insurance,but it may be unaffordable for them.

The most common form of microinsurance is credit life. As discussed inChapter 2.3, it is common in credit unions and other MFIs for the outstand-ing balance of a loan to be covered should a client die. While credit life can bea good source of revenue for an MFI, policyholders often question the value


of the credit-life product and see the primary purpose as being to protect thelender, not the borrowers.5

Funeral insurance (see also Chapter 2.3) is popular, especially in countrieswhere the high cost of burials or funerals can put a family heavily into debt(see Box 8).

Box 8 High cost of funerals in Zambia

Madison Insurance in Zambia has developed a funeral insurance product thatis distributed through MFIs. Since funerals in Zambia can cost betweenUS$300 and US$500 (the GDP per capita is US$900), this was a welcomeaddition to the financial services offered to the poor. In the words of oneclient: “Thandizo (the insurance product) is one of the best services I havereceived from Pulse (one of Madison’s MFI agents). For the insured membersof my house, I am assured I will not have to struggle to meet funeral costs,and my business income is spared.”

Source: Adapted from Manje, 2005.

In some parts of Africa and elsewhere, women are especially vulnerablefollowing the death of a husband when they lose their property to other rela-tives (in the absence of property rights or knowledge of ways to exercisetheir property rights). For many women, their priority is life insurance fortheir husbands. In the event of their own death, women fear that their hus-bands may use an insurance payout intended for the children’s education toinvest in a new wife. Increasingly, women prepare for their own death bydesignating their friends as beneficiaries and instructing them to use themoney for the children’s school fees and other necessities (Cohen and Sebstad,2005).

Health insurance is in high demand, but difficult to deliver (see Chapter2.1). Households want comprehensive coverage, but often lack both thecapacity to pay and access to quality services. As rural Nepalis noted, “in theabsence of good health services, paying for health insurance is simply awaste” (Simkhada, et al., 2000). Furthermore, as discussed in Chapter 1.3, therole of the state in the provision of health insurance cannot be ignored. It willcontinue to be important in determining the likely role of health insurance inmany countries.

Despite its potential, the effective demand for microinsurance is stillunclear. Many microinsurance products are bundled with loans, and the


5 There is considerable support for this argument. The number of claims paid annually is usually verysmall. In addition, many MFIs set age ceilings for borrowing, ensuring that clients are out of theprogramme before they become high death risks.

premium is included as a fee paid at the time of loan disbursement. This hastwo effects: 1) people are often unaware of how much they are paying andwhat they are actually paying for and 2) when clients stop borrowing, theygenerally lose their insurance coverage.

3.4 Social protection

For many of the working poor, government health services could be anoption to cover health and disability risks. However, many poor householdsprefer private services to low-quality public healthcare. Indeed, with low-income households bearing as much as 80 per cent of their health costs insome countries, many poor people see an obvious opportunity for micro-insurance (McCord, 2005).

In transition countries, the decline of universal social protection has left adifferent gap and opportunity for microinsurance. Despite the declining roleof the state in the provision of healthcare, people’s behaviour has laggedbehind. Few households budget for their health expenses (Matul, 2006).

Governments have a role in allocating funds to protect the destitute andthose with no ability to generate sufficient funds for risk management. Pri-vate insurance will never be an option for this market.

4 Opportunities for microinsurance

In deciding where microinsurance can most effectively fit into the mix ofrisk-management strategies, it is first necessary to determine which risks bestlend themselves to insurance. The ICMIF test for an insurable risk suggestsone approach (Table 5).

The next question is where microinsurance can add value for the client.The above review suggests that managing risk is currently an ex post ratherthan an ex ante activity for low-income households. Self-insurance is themost common risk-management option, but its effectiveness is limitedbecause it generally covers only a small portion of the loss. This has a nega-tive effect on income and assets in the short term, and on the capacity tomanage future risks in the longer term. People often get by with great diffi-culty, trying to stay one step ahead of the next crisis. By increasing theportion of the loss covered, insurance could meet a need and reduce thestresses associated with poverty.


Analysts of demand data need to be discriminating in interpreting thefindings. While poor people experience many risks and their coping mecha-nisms are imperfect, this does not necessarily translate into demand forinsurance. Experience with informal group-based insurance is not alwaystransferable to microinsurance. For example, according to McCord andBuczkowski (2004), even though the members of CARD MBA in the Philip-pines participate in damayan-type schemes, they have little knowledge offormal insurance concepts and products.

The review of risk-management strategies provides insight into the prod-uct attributes that might be integrated into the design and delivery of micro-insurance products. This section considers six aspects of insurance demand:1) coverage, 2) accessibility, 3) timeliness, 4) pricing and affordability, 5) clienteducation and 6) market segmentation.

4.1 Coverage

Health coverage is a top priority for low-income households in most coun-tries. The most common insurance products available to the poor include lifeand funeral insurance. On a smaller scale, there are initiatives concerned withhealth protection, livestock, crop and property insurance.

While the level of coverage varies for different products, typically no sin-gle form of insurance provides full coverage to low-income households.Many clients would prefer more coverage, but cannot afford it. In SouthAfrica, where funeral insurance is available, the cost of funerals is most oftencovered by income, savings, borrowing and gifts, in that order. Insurancebenefits, in cash and in kind, come fifth and sixth and account for less than 20per cent of the expenses (Financial Diaries, 2005).


Test for an insurable risk

! Does the loss occur by chance?

! Is the loss definite in time and amount?

! Does the loss create significant hard-ship relative to income?

! Are a large number of similar unitsexposed to the risk?

! Is it possible to estimate the possibilityof the loss occurring?

!Will the risk pool attract sufficientnumbers of clients who are unlikely tosubmit claims (does it meet the criteriafor adverse selection)?

! Is the loss a genuine loss to the insured(no house, no house insurance)?

! Is the loss one that will not be cata-strophic to the insurer? Does the samerisk affect more than one person orhousehold at a time? Is it idiosyncratic?

Source: ICMIF, 2005.

Table 5

Even with access to insurance, low-income households will continue tocover the costs of shocks from a mix of financial services, i.e. formal, infor-mal and self-insurance. In developing insurance products, it is important torecognize the complementarities among different financial services, as well asdifferent institutional providers of social protection, to see how they mightwork together to better manage risks.

While disability risk is covered by some policies, insurance usually pro-vides a one-off payment rather than a replacement for loss of income orsalary. Thus, only a part of the loss is covered. This creates high stress for theworking poor when health risks affect their ability to earn income.

Flexible schemes that offer different levels and types of coverage providepeople with more options, but can be more complex to administer andrequire more client and staff education. Coverage levels and product features,especially policy exclusions, are rarely explained or fully understood by thetarget market. For example, in Uganda, policyholders’ lack of knowledgeabout the insurance product was consistent across the MFIs that offer cover-age backed by AIG Uganda. Many were not aware of all of the product’sbenefits, and they often did not distinguish between family members coveredby the policy and the person who is to receive the cash payout if the policy-holder dies by accident. They considered all of them as beneficiaries of insur-ance (McCord et al., 2005a).

4.2 Accessibility

Self-insurance is the only option open to everyone. Group-based informalinsurance depends on trust and reciprocity, features that also have beenimportant to the success of solidarity group lending. Access is closely associ-ated with being part of a social network. The groups provide the basis forrisk pooling and a platform for administering regular contributions and pay-outs. Membership in a group is an important way that poor people buildsocial capital and access informal insurance. The extent to which existinggroups might provide an institutional base for expanding the outreach andaccess to microinsurance is unknown. Some mutual health schemes have pur-sued this route (see Chapter 4.3).

The ability to obtain birth and death certificates or identity cards alsoaffects the accessibility of microinsurance. Providing claims documentationcan be even more challenging for poor people in remote areas where bureau-cratic systems do not function well, or in areas where civil conflict affects thesecurity and mobility of people. Complex payment and claims processes canalso affect accessibility. Formal insurance is frequently plagued with claimpayout problems. The claims process is often too complex and impersonal


for people whose previous experience with risk-management instruments iswith their communal welfare associations.

To date, MFIs have played an important role in developing microinsur-ance and making it accessible to low-income groups. The advantage is theiroutreach to the poor. One limitation, however, is that not all types of insur-ance are relevant to the interests of the MFI (in terms of reducing arrears).Another limitation is that microinsurance policies for many microcreditproviders are linked to their loans and therefore available only to theirclients. If microinsurance is to be open to all low-income households, it isessential for credit and insurance to be de-linked and for the payment of thepremium to be separate from the disbursement of loans.

4.3 Timeliness

By definition, low-income households are vulnerable to shocks because theylack cash reserves to cover immediate expenses. Consequently, the timelinessof claim payments is crucial for product adoption. People in eastern andsouthern Africa prefer welfare associations because they require little or nopaperwork to verify a death, and payouts can be immediately available. Incontrast, claim payments by insurance companies can take months.

4.4 Pricing and affordability

Evidence shows that demand for microinsurance is high and there is a will-ingness to pay. In some countries, people are particularly interested in insur-ance that is coupled with asset building. In Indonesia, for example, the firstpriority is an insured savings product for education, with payouts made asneeded to cover selected school fees (McCord et al., 2005b).

With microinsurance consumers increasingly discerning and heteroge-neous, there is a need for premium payments to be structured in ways thatmake sense to the policyholders. As discussed in Chapter 3.3, insuranceproviders would do well to match the premium payments to the cash flow oflow-income households. In this respect, informal mechanisms have provenmore responsive to client needs than many current microinsuranceproviders. For example, in Albania, Opportunity International found that anexisting insurance product failed not because the terms and pricing wereunacceptable, but because the premium had to be paid in advance. The up-front payment requirements were not in line with the potential policy-holders’ cash flow (Leftley, 2002).


So what is the capacity to pay? This is difficult to determine. As Matuland Tounitsky (2006) have noted, this is not only a function of income levelsbut also very subjective. The level of financial literacy strongly influenceswhat people think they can afford; client education on the insurance productinfluences what people think they are getting for the price.

There is mounting evidence that some policyholders are very sensitive tothe value of the costs and benefits of a microinsurance policy. Across threecountries in West Africa, CIDR found that the contribution of householdincome to health insurance is consistently between 1.5 and 2.5 per cent ofhousehold income. When the premium price is raised above 2 per cent,households adjust by reducing the number of household members coveredby insurance, rather than increasing their premium payments (Galland,2005a). In Ukraine, market research showed that a decrease in the premiumby 30 per cent was met by a 10 per cent increase in policyholders (Matul,2006). Indeed, market research is critical to better understand ability and will-ingness to pay (see Box 9).

Box 9 Understanding the demand for microinsurance in Sri Lanka

Yasiru policyholders in Sri Lanka found that the benefit payments were notproportionate to premiums that they were paying and that the insurance pol-icy did not clearly define the number of family members covered. An assess-ment of client preferences led to policy adjustments to ensure that premiumsbetter matched benefits and the relationship between premiums and thenumber of family members covered was clearer.

Source: Adapted from Fokoma, 2004.

Poverty limits the number of financial obligations a person can take on.Experience from an MFI-linked insurance scheme in Nepal suggests thatmany poor households find the burden of an insurance premium on top of aloan repayment to be a strain. Policyholders who already had health insur-ance were unwilling to pay a second premium for voluntary life insurance(CMF, 2005). However, the mandatory nature of many insurance productsmakes it difficult to predict the demand (and willingness to pay) among poorhouseholds for voluntary insurance at different premium levels.

4.5 Insurance education

Risk management by the poor is not new, but for many people insurance as arisk-mitigation instrument is. As a result, its adoption presents a challenge toclients and sales agents. Among those who have heard about insurance, thereis considerable scepticism. For many low-income households, insurance is


seen as the province of the rich. Indeed, confidence in the insurance industryis often low and negative perceptions abound. There is a reluctance to pay inadvance for services one may not receive, especially an intangible service thatone may not even understand. For those who have had experience withinsurance or have heard about the experiences of others, the limited scope ofcoverage and the long delays in settling claims exacerbate the negative per-ception. In some cultures, it is not always socially acceptable to bet on nega-tive events: any focus on illness and death is seen as wishing for bad luck.

If microinsurance is to succeed, there is a vital need for strategic invest-ments in consumer education to change these perceptions. The knowledgeand attitudes of low-income households and insurance agents need to beimproved. While some organizations selling microinsurance give potentialpolicyholders information describing the premium, benefits and claims pro-cedures, this has limited value if the policyholders – and often the insuranceagents – lack a basic understanding of insurance and risk management. Asillustrated in Box 10, many poor persons are interested in learning moreabout insurance.

The success of microinsurance adoption is not simply a function of mak-ing certain that products are appropriate and affordable, but is also depend-ent on a level of financial literacy that enables consumers to assess what theyare getting when they pay a premium. Changing the consumer’s knowledge,skills and attitudes toward insurance, and creating an insurance culture, areimportant in facilitating the adoption of this formal financial service.

Box 10 We want to know more …

1. MalawiWhile the MUSCCO members were aware of insurance, they did not neces-sarily know what an insurance policy was. They wanted more informationabout insurance, including its costs and benefits (Enarsson and Wirén, 2005).

2. UgandaMost policyholders did not know how much they were paying, what wascovered or how to make claims. The insurance agent (an MFI staff person)also knew little and therefore could rarely be of much help (Cohen and Seb-stad, 2005).

3. GuatemalaColumna policyholders said that they wanted to be better informed, but theinstitution failed to provide them with more information (Herrera andMiranda, 2004).


4.6 One size does not fit all

Demand research shows that generalizing across countries and regions isrisky when considering the attributes of risk-managing financial services.One size does not fit all. For example, in Nepal and Indonesia there is limiteddemand for life and funeral insurance as funeral expenses are kept at a levelthat the family can afford (Simkhada et al., 2000; McCord et al., 2005b). Bycontrast, life and funeral insurance are very much in demand in Uganda andSouth Africa. In both countries, there are high levels of expenditure on therites associated with funerals; meanwhile traditional systems of communitysupport have been under a lot of stress, especially in regions affected byHIV/AIDS (Sebageni, 2003; Bester et al., 2004).

Demand studies also reveal different insurance priorities for differentmarket segments. The one-size-fits-all approach that characterizes the designof many life insurance products does not typically consider differences ingender, location or life-cycle position of the policyholder. For example, forpoor middle-aged women, life cover for their spouses is likely to have a high-er priority than cover for their own lives.6 SEWA Bank clients in India madethis point and were successful in securing life insurance policies for their hus-bands even though the bank manager assumed they would find it unafford-able. As alternative delivery channels are used to reach the working poor,such as those described in Chapters 4.5 and 4.5, other market segments willbe reached, bringing a demand for different products or product features.

The experience of low-income households illustrates the importance ofcomplementary activities across different market segments, not only to miti-gate losses resulting from insurable risks (e.g. loss of life), but also to helpbuild and protect assets – thereby strengthening the longer-term capacity ofhouseholds to manage risks. Stress events such as weddings, payment ofschool fees and housing expenses often exert great financial pressure, espe-cially for women. Insured savings or endowments offer potential solutions.These endowment products, offered by insurance companies in Indonesia,Bangladesh and Ghana, for example, have proved popular among the poor(though less so in Sri Lanka). They build assets while protecting peopleagainst potential losses. However, they are not without the risks associatedwith long-term macroeconomic and corporate stability, and may not be themost cost-effective way for the poor to manage risks (see Chapter 2.2).


6 Many microfinance borrowers fit this profile, but the MFI’s rules may require her to leave the pro-gramme at 55 or 60, at which time she will stop contributing to life insurance and her children willno longer receive benefits should she die. Under these circumstances, what does she have to gainfrom a life insurance policy?

5 Conclusion

The growing number of demand studies is beginning to provide a crediblebase of information which can be used to estimate market demand and helpdesign appropriate products in selected countries. This is enabling serviceproviders to move away from simply downsizing existing insurance productsoriginally aimed at the middle class to developing products and services thatwork for the “bottom of the pyramid”.

The market for microinsurance is large. All stakeholders, insurance com-panies, their agents and policyholders have much to gain from this marketbeing served well. However, getting everyone working together will taketime. In the absence of a strong insurance culture among low-income house-holds, client demand in many places is still evolving. Where insurance hasworked well for low-income households – where the coverage is appropriate,accessible, affordable and well understood – it has been met with consider-able and growing success. It reduces risk and vulnerability in the lives ofpoor people, allowing them to move from reactive to proactive behaviourand thus plan for the future. With more financial control, poor people havemore options. Research on client demand can continue to play a key role inthe development of successful microinsurance products.


1 Introduction

Access to social security is a fundamental human right. Moreover, socialsecurity and social protection are increasingly recognized in the globaldebate as indispensable components of poverty reduction, sustainable eco-nomic development, fair globalization and decent work. In this respect, theWorld Commission on the Social Dimension of Globalization stresses that aminimum amount of social protection must be accepted as being an integralpart of the socio-economic base of the global economy. Social protection isalso a key tool for the attainment of the Millenium Development Goals(MDGs).

Therefore, social protection is much more than a risk-managementinstrument for individuals. It is a comprehensive, collective tool to reducepoverty, inequality and vulnerability. It promotes equity and solidaritythrough redistribution. And it provides fair access to healthcare, incomesecurity and basic social services. However, more than half of the world’spopulation does not benefit from any form of social protection.

Facing exclusion from social protection, local communities are taking ini-tiatives to organize microinsurance schemes. Microinsurance is deliveredthrough a diversity of organizations covering various risks or contingenciesincluding health, maternity, life and disability. Some schemes are not justrisk-management instruments, but have the potential to contribute to theextension of social protection to excluded groups. Furthermore, theseschemes can improve the governance of social protection providers (e.g.healthcare) and raise supplementary resources that enhance social protectionas a whole. This is particularly necessary where the state has limited financialand institutional capacity.

1.3 The social protection perspective on microinsuranceChristian Jacquier, Gabriele Ramm, Philippe Marcadent and Valérie Schmitt-Diabate1

The authors appreciate the comments provided by Bruno Galland (CIDR) and Rüdiger Krech (GTZ).

1 This chapter is adapted from a forthcoming publication by the ILO and GTZ entitled The role ofmicroinsurance as a tool to face risks in the context of social protection. Examples from Senegal aredrawn from the authors’ experiences.

Microinsurance schemes can be components of social protection systems,as illustrated in Figure 4, although this has several implications:

– Microinsurance schemes may assume some social protection functions, suchas redistribution through internal cross-subsidies or by channelling publicsubsidies to their members.

– Microinsurance schemes should not only be evaluated on technical aspects(e.g. financial viability), but also on their capacity to reach social protectionoutcomes; the socio-economic impact of these schemes on members andnon-members should be taken into consideration.

– A non-regulated market may fail to provide an efficient benefit package forthe poor.

– Microinsurance schemes can play an important role in the empowerment andparticipation of their members, which has implications in terms of the designof the products, the choice of the benefit package, affordability and theorganization of the schemes.

Figure 4 The locus of microinsurance

However, stand-alone, self-financed microinsurance schemes have majorlimitations on their ability to be sustainable and efficient social protectionmechanisms capable of reaching large segments of the excluded populations.Their potential to extend social protection is increased when governmentsinclude them in national social protection strategies, linking them to othersocial protection components to create a progressively more coherent, effi-cient and equitable system.

This chapter explores the relationship between social protection andmicroinsurance by first defining social security and social protection. Withinthat context, the chapter then defines microinsurance, and goes on to illus-trate its potential and limitations. Finally, it provides some illustrations ofhow microinsurance can be used to extend social protection to excluded pop-ulations and to overcome some of the inherent limitations.


Risk-management measures

Social protection

Microinsurance

2 What is social security? What is social protection?

2.1 Definition, objectives and key functions

According to the ILO (2000), social security is the protection which societyprovides for its members through a series of public measures:

– to compensate for the absence or substantial reduction of income from workresulting from various contingencies (notably sickness, maternity, employ-ment injury, unemployment, invalidity, old age and death of the breadwinner),

– to provide people with healthcare,– to provide benefits for families with children.2

Social protection includes not only public social security schemes butalso private or non-statutory schemes with similar objectives, such as mutualbenefit societies and occupational pension schemes, provided that the contri-butions to these schemes are not wholly determined by market forces.

This definition of social protection is one of several approaches. Otherorganizations, such as the World Bank and the Asian Development Bank, usemore holistic conceptions of social protection (“social risk management”).They include a larger range of contingencies – anything that affects individu-als’ income security – which naturally overlaps with other sector policies,such as education or labour. This broader view not only includes protectingmechanisms, but also promotional interventions to increase assets or eco-nomic opportunities (such as microfinance programmes, price supports orcommodity subsidies). Indeed, the concepts of social protection are stillunder discussion, for example in the Network on Poverty Reduction facili-tated by OECD’s Development Assistance Committee.

Regardless of the specific definition, social protection is an important toolto prevent poverty and strengthen the capacity of the poor to get out ofpoverty. For instance, some social protection measures consist of a directtransfer of funds to the poorest (identified through means testing), which has

47The social protection perspective on microinsurance

2 The ILO has a number of social security conventions that deal with the practical implementation ofthis human right. The most important is the Social Security (Minimum Standards) Convention, 1952(No. 102). It defines nine branches of social security and the corresponding contingencies covered:medical care, sickness benefit, unemployment benefit, old-age benefit, employment injury benefit,family benefit, maternity benefit, invalidity benefit and survivors’ benefit. In addition, it introducesthe idea of a minimum level of social security that must be achieved by all member states. To takeinto account different national situations, ILO conventions on social security typically contain flex-ibility clauses regarding the population covered, and the scope and level of benefits provided. Theyalso give states full discretion in the organization of their social security scheme. In other words,these conventions affirm the right of everyone to social security, but recognize the practical difficul-ties in actually implementing this right in the social realities that prevail worldwide.

a direct and at least temporary effect on poverty. Social protection alsoreduces poverty through its positive impact on economic performance andproductivity. It can be seen as a productive factor for three main reasons(ILO, 2005b):

1. Social protection helps people to cope with important risks and loss ofincome. In doing so, it can enhance and maintain the productivity of workersand create possibilities for new employment. For instance, healthcare sys-tems help maintain workers in good health and cure those who become sick.Similarly, work injury schemes help prevent accidents and sickness and reha-bilitate injured workers.2. Social protection can be a critical tool in managing change in the econ-omy and the labour market. For instance, unemployment insurance creates afeeling of security among the workforce, which encourages individuals toundertake riskier initiatives that may result in a higher return for them andfor the economy.3. Social protection can stabilize the economy by providing replacementincome that smoothes out consumption in recessions, thus preventing adeepening of recessions due to collapsing consumer confidence and its nega-tive effects on domestic demand. For instance, unemployment benefits andold-age pensions help to maintain the purchasing power of workers afterthey have lost their jobs or retired.

Social protection can enhance principles such as solidarity, dignity andequality. Solidarity arises when everyone contributes to a common potaccording to their capacity and draws from this pot according to their needs(within the limits fixed by the internal rules of the scheme). Solidarity canalso materialize through the redistribution of funds raised through taxes. Thelevel of solidarity depends on the nature of the financing instruments that are being used: while income tax or income-related contributions are usuallyprogressive, consumption taxes or flat-rate premiums run the risk of beingregressive.

Social protection is linked with the principle of dignity since it gives peo-ple the right to live a decent life whatever adverse events afflict them. Unlikecharity, social protection integrates individuals in a process of exchange,where they have the right to receive and the obligation to give. Their dignityis recognized by allowing people the possibility to contribute. Social protec-tion is also linked with the principle of equality (including gender equality)and non-discrimination when equal rights are given to all people exposed tothe same risks or supporting the same burdens without discrimination.

The application of the principles of solidarity, dignity and equality within


social protection help to foster social cohesion, inclusion and peace, whichare prerequisites for stable long-term economic growth. Furthermore, theintegrative role of social protection brings individuals or groups that havebeen excluded into the mainstream by providing support in accessingemployment and becoming active, and possibly tax-paying, members ofsociety (Piron, 2004). Social protection can finally be a tool to promoteempowerment and participation through the representation of workers inthe formal economy (within statutory social protection schemes) and infor-mal economy (within community-based social protection schemes). Thisparticipation is one way of enhancing democracy.

The ILO’s conception of social protection (definition, functions) isshared by many institutions worldwide. Recently, the most important inter-national federations and organizations representing the cooperative andmutual insurance sector formed the International Alliance for the Extensionof Social Protection.3 Their shared vision, values and principles are articulat-ed in “the Geneva Consensus” 2005, which recognizes that “social security isa fundamental and universal human right”. This consensus also enumeratesbasic principles and values regarding social protection – such as solidarity,redistribution, role in economic and social development, importance of effi-ciency, relevance, good governance and financial viability – and suggests thatthe values of the cooperative and mutualist movement be held in high regard(e.g. social justice, absence of exclusion and discrimination, non profit, par-ticipation and empowerment).

2.2 Gaps between right and reality

The definition of social security as a human right starts from the principles ofuniversality and equality: every human being is equally entitled to socialsecurity, which has two major implications.

1. States have an obligation to take measures to guarantee this right. They have to take appropriate legislative, administrative, budgetary, judicialor other measures to ensure that the right is guaranteed to their populations.This obligation does not necessarily mean that the state has to provide socialprotection directly; it can facilitate or encourage actions of third parties.Obligation can be of conduct: states have to take the necessary steps to guar-


3 The members include: ISSA (International Social Security Association), AIM (Association Interna-tionale de la Mutualité), ICA (International Cooperative Alliance), ICMIF (International Co-opera-tive and Mutual Insurance Federation), IHCO (International Health Co-operative Organization),WIEGO (Women in Informal Employment: Globalizing and Organizing) and the ILO. For moredetails about the International Alliance, see www.social-protection.org.

antee a particular right. Obligation can also be of result: states have to achievespecific targets to satisfy a specific standard. In addition, there is an obliga-tion of the international community, so far unofficially recognized, to sup-port states with insufficient resources to guarantee human rights, includingthe right to social security. This is in line with the idea behind the GlobalFund for Malaria, Tuberculosis and HIV/AIDS.

2. Everybody is entitled to a minimum level of social protection, withoutexception or discrimination. This entitlement includes an equitable access tosocial protection, independent of individuals’ age, sex, health status, location,occupation or income level. This entitlement to a minimum level of socialprotection is often used to justify the design and implementation of equitysubsidies from the rich to the poor.

Yet in many developing countries, social protection coverage is dramati-cally low: it reaches only a small proportion of the population and providesprotection against only a limited range of risks. In sub-Saharan Africa andSouth Asia, only 5 to 10 per cent of the population is covered by a statutorysocial security scheme, primarily old-age pension schemes and access tohealthcare (ILO, 2001). In some countries, the percentage of the populationcovered is even shrinking due to structural adjustment policies, privatizationand the development of the informal economy. Although some excludedpeople work in the formal sector, the vast majority are active in the informaleconomy.

Until the last decade, social protection strategies were based on theassumption that the formal economy would progressively gain ground onthe traditional economy, and therefore social security would progressivelycover a larger proportion of the workforce. However, this has not happened.In many developing countries, most of the jobs created during the last decadehave been in the informal economy (ILO, 2002a). Today, informal employ-ment comprises one half to three quarters of non-agricultural employment indeveloping countries. If informal employment in agriculture is included inthe estimates, the proportion of informal employment increases significantly,for example from 83 to 93 per cent in India, from 55 to 62 per cent in Mexico,and from 23 to 34 per cent in South Africa (ILO, 2001). Although somestates have tried, so far attempts to extend the coverage of statutory socialsecurity to workers in the informal economy have been insufficient.


2.3 Priority to extend social protection coverage

It is therefore necessary to find other ways to translate the right to social pro-tection into reality. At the International Labour Conference in 2001, govern-ments and employers’ and workers’ organizations representing 160 countriesagreed upon a new consensus on social security; they agreed notably thathighest priority should be given to policies and initiatives to extend socialsecurity to those who have none, and they proposed several ways of accom-plishing that objective:

When these groups cannot be immediately provided with coverage, insurance– where appropriate on a voluntary basis – or other measures such as socialassistance could be introduced and extended and integrated into the socialsecurity system at a later stage when the value of the benefits has beendemonstrated and it is economically sustainable to do so. Certain groups havedifferent needs and some have very low contributory capacity. The successfulextension of social security requires that these differences be taken intoaccount. The potential of microinsurance should also be rigorously explored:even if it cannot be the basis of a comprehensive social security system, it couldbe a useful first step, particularly in responding to people’s urgent need forimproved access to healthcare. Policies and initiatives on the extension ofcoverage should be taken within the context of an integrated national socialsecurity strategy (ILO, 2001).

At the suggestion of the Conference, in 2003 the ILO launched the “GlobalCampaign on Social Security and Coverage for All”.

When faced with the present situation where a large (and growing) num-ber of persons are excluded from social protection, it is necessary to deviseproactive strategies to extend it. These strategies aim at increasing the num-ber of persons covered and at improving the level and the scope of existingsocial protection benefits. A range of mechanisms can be used to implementthese strategies, for instance:

– Social insurance schemes can extend existing or modified benefits to previ-ously excluded groups, on either a compulsory or a voluntary basis. Theinclusion of these groups may also enhance the schemes’ effectivenessthrough improved governance and design.

– Special social insurance schemes can be set up for excluded groups.– Universal benefits covering the whole target population without any con-

dition or income test (for instance, those over a certain age) can be imple-mented.


– Social assistance programmes targeting specific vulnerable groups can also beimplemented: waivers, social pensions/cash benefits, conditional cash trans-fers (for instance on school attendance).

– A complementary option is to encourage and support the development ofmicroinsurance and innovative decentralized social security schemes to pro-vide social protection through communities, social partners4 or other civilsociety organizations.

3 What is microinsurance?

As described in Chapter 1.1, a microinsurance scheme may be an organiza-tion, like a mutual benefit society. It could also be a set of institutions work-ing together, such as insurers that collaborate with microfinance institutionsto provide insurance to the poor. Or it could be an insurance product provid-ed by an organization that conducts other activities, like an agriculturalcooperative that also provides insurance to its members.

Microinsurance schemes are often initiated by civil society organizations.Increasingly, these organizations cooperate with formal social protectionschemes (e.g. insurance companies, social security schemes), public institu-tions (e.g. departments of health, labour and social affairs), service providers(e.g. healthcare providers, third party administrators (TPAs)). Sometimes evenmunicipalities or local authorities are involved in offering microinsurance.

For a scheme to be of interest in the context of social protection, some ofits beneficiaries should be excluded from formal protection schemes, inparticular informal-economy and rural workers and their families. Amicroinsurance scheme differs from programmes that provide statutorysocial protection to formal workers. Membership is not compulsory (but canbe automatic). The members contribute, at least partially, the necessary pre-miums to pay for the benefits. Since their capacity to contribute is often low,the coverage provided by these schemes is – in the absence of subsidies – usu-ally limited, with a small number of risks covered and low levels of benefits.

As discussed in the previous chapter, workers in the informal economyand their families typically request coverage for illness and death; thedemand for protection against other risks is less widespread, although it canbe significant in certain markets (e.g. the demand for livestock and crop cov-erage in rural areas). In terms of availability, not all microinsurance productsare present in all countries. Some products may be well-established in one


4 The ILO is a unique forum for governments to interact with employers’ and workers’ organizations,otherwise known as social partners. In the ILO’s tripartite governance structure, employers’ andworkers’ organizations have an equal voice with governments in shaping its policies and pro-grammes.

region, but almost non-existent in another. For example, life microinsuranceis seldom found in western Africa, whereas it is relatively developed in someAsian countries.

According to inventories of microinsurance schemes conducted in2003/2004 in 11 African countries, India, Bangladesh, Nepal and the Philip-pines (ILO/STEP, 2003/2004):

– health microinsurance is predominant in Africa (100 per cent of investigatedschemes) and the Philippines (70 per cent of the schemes provide healthinsurance); it ranks second in India (56 per cent of schemes) and Nepal (52 percent), and is less important in Bangladesh (39 per cent);

– life microinsurance is most common in Bangladesh (72 per cent of investigat-ed schemes provide life insurance), the Philippines (66 per cent) and India (60 per cent); it is less available in Nepal (38 per cent); and

– examples of crop microinsurance were found only in India (two schemes in2004); pension schemes were only seen in India (4 per cent of investigatedschemes) and the Philippines (24 per cent).

4 Potential and limitation of microinsurance as a social protection mechanism

Not all microinsurance plays a role in extending social protection. Someproducts – such as asset, livestock and housing microinsurance and credit-linked insurance that only covers the outstanding loan balance – though cer-tainly beneficial, do not provide social protection coverage in the strict sense.In contrast, other products, such as health, life, old-age pensions and disabil-ity covers address the nine contingencies specified in ILO’s Social SecurityConvention (No. 102) and therefore play a role in the extension of socialprotection.

4.1 Positive contribution of microinsurance in the extension of social protection

Where governments have limited financial and institutional capacity,microinsurance schemes may raise supplementary resources (finance, humanresources, etc.) which benefit the social protection sector as a whole. Morespecifically, health microinsurance schemes help to improve access to health-care by lowering the financial barriers that delay or impede access. In somecases, the quality of care is even improved, for example when the schemessign agreements with healthcare providers on the quality of delivery. Con-


tracting with healthcare providers also increases transparency in billing prac-tices and the way the health sector is managed.

Microinsurance also has several positive effects on the participation ofcivil society and the empowerment of socio-occupational groups includingwomen. For example, since many schemes are set up and operated bywomen’s associations, they may strengthen women’s capacity to meet theirhealth needs including those linked with their reproductive role.

Moreover, microinsurance as a mechanism to extend social protection hasthe following comparative advantages over classical social security schemes:

1. Microinsurance can reach groups excluded from statutory social insurance,such as workers in the informal economy and rural workers.2. The transaction costs necessary to reach these populations may bereduced, since microinsurance schemes are often operated by decentralizedcivil society organizations, often relying on voluntary self management, thatare implemented in the vicinity of the target population.3. Microinsurance benefits are often designed in partnership with the targetpopulation. This participation is highest in mutual benefit associations wherethe benefit package is voted on by the general assembly. In other types ofschemes, the target groups are usually consulted, for instance through house-hold surveys. As a result, microinsurance often responds to the target popu-lation’s needs and ability to pay.4. Community-based schemes usually experience fewer problems with fraudand abuse than centralized social protection systems since members oftenknow each other, belong to the same community and share the same inter-ests. However, community-based schemes can have difficulty collecting reg-ular contributions, resulting in retention problems and sustainability chal-lenges. Some schemes manage this issue of low renewals through groupinsurance contracts with organized occupational groups (such as coopera-tives).

The development of microinsurance is ongoing, with a proliferation ofnew schemes, especially in India. For example, ILO/STEP (2004) found 60microinsurance schemes covering 5.2 million people. The inventory is beingupdated; the current (early 2006) number of schemes stands at 71 coveringmore than 6.8 million people in India and 240 microinsurance schemes cov-ering 25 million people in 8 countries of Asia. This suggests that theseschemes respond to a real demand and that they manage to solve a certainnumber of issues, at least at the local level.


4.2 Current limitations of microinsurance as a mechanism of extension ofsocial protection

Despite these apparent advantages, certain characteristics of microinsuranceschemes limit their contribution to the extension of social protection:

1. Although microinsurance is becoming more common, many personsexcluded from legal social protection schemes are still not covered bymicroinsurance either. In fact, many of these schemes (particularly in Africa)have great difficulty extending their geographic or socio-occupational out-reach and increasing their membership.2. Many microinsurance schemes have poor viability and sustainability.These two points are linked (particularly in Africa) with poor managementskills (not enough financial resources to employ professional staff) and inad-equate information systems, which makes it difficult to monitor the scheme’soperations.3. Members’ ability to pay is most often very low, which leads also to limitedbenefits in the absence of subsidies.4. Most schemes do not take over the functions that are usually fulfilled bystatutory social security schemes – such as redistribution between richer andpoorer segments of the population – because contributions are often basedon a flat rate. In addition, few schemes reach the poorest segments of theexcluded groups who cannot contribute.5. In many countries, the legislative framework and regulations are not adapt-ed to these schemes and do not facilitate their replication and expansion.6. Microinsurance schemes are usually self-governing organizations. Theymay pursue objectives that are not in line with government’s strategy ofsocial protection and their promoters may be unwilling to participate innational systems of social protection, as this could threaten the schemes’autonomy.

5 How can microinsurance be used to extend social protection?

An increasing number of states consider microinsurance as a tool for theextension of social protection, and include this mechanism in their extensionstrategies. In several countries, microinsurance schemes are already part ofthe process of implementing progressively more coherent and integratedsocial protection systems:


– In India, the prescribed use of the partner-agent model (see Chapter 5.2)increases the acceptance of insurance by the target groups;

– In Senegal, microinsurance schemes are mentioned in the national social pro-tection strategy as a key mechanism to extend social protection;

– In Rwanda and Ghana, the State implements nationwide social protectionschemes in health that are built on district- and community-based mutualorganizations.

– In Colombia, the government provides subsidies that enable the poor to bepurchasers of health insurance, which even stimulates competition to servethe low-income market by microinsurance providers and others (Box 11).

Box 11 The extension of social protection through microinsurance in Colombia

As a part of the reform of the healthcare system in Colombia in 1993, a spe-cial scheme (Régimen Subsidiado de Salud) was introduced to finance health-care for the poor and vulnerable groups (including their families) who areunable to pay contributions to the general insurance scheme.

The funds are raised through a solidarity contribution collected under thecontributory social insurance scheme and various state subsidies. They arethen channelled to several institutions, including 8 mutual benefit associa-tions federated in a national apex organization Gestarsalud, which now cov-ers 60 per cent of the market, “cajas de compensación” (20 per cent of themarket), and several private commercial insurance companies that also cover20 per cent of the market. Today this successful subsidized scheme covers18.5 million people.

Source: Adapted from Pérez, 1999.

There are three ways to overcome the limitations mentioned above. First,further development of microinsurance is required to increase the populationcovered, enhance the benefits package and strengthen the capacities of theschemes. Second, linkages need to be developed with other players and insti-tutions. Third, microinsurance needs to be further integrated into coherentand equitable social protection systems.

5.1 The further development of microinsurance

The further development of microinsurance has implications for variousactors, including the promoters and operators of the schemes, as well as thestate.


For microinsurance promoters and operators, this further developmentmay mean altering the way the schemes currently operate. Management mustbecome more professional to enable the schemes to deal with the increasingcomplexity of meeting the needs of the target group. One way of doing thatis to outsource some management functions to specialized organizations. Itmay also mean setting up new schemes targeting the members of large organ-izations such as trade unions, cooperatives and occupational associations.Larger schemes are in a position to provide more comprehensive coverage,particularly against major risks like hospitalization, and they are often moresustainable as they can more easily build up financial reserves.

As described in Chapter 5.3, the state may also support the developmentof microinsurance through promotion and the sensitization of public opin-ion (particularly the target population). Other government measures mightinclude:

– building the capacity of microinsurance schemes through improved manage-ment and monitoring systems,

– strengthening the viability and the financial capacity of the schemes, forexample through reinsurance or guarantee funds,

– supporting structures like second-tier associations or networks that providetechnical support and training to microinsurance schemes,

– facilitating the exchange of information between actors to make sure thatsuccessful experiences can be replicated with other groups or in differentgeographic areas,

– formulating recommendations on design: benefits package, affiliation,administration, methods of payment to healthcare providers and

– establishing structures to produce information (statistics, indicators) that canbe used by these schemes to price their products more accurately.

5.2 The development of linkages

A key strategy to strengthen microinsurance schemes and compensate forsome of their weaknesses is to link them to other organizations, institutionsor systems. Table 6 provides a few examples, classified according to the typesof mechanisms used and the possible partners.


The sharing of functions or responsibilities according to each party’s corecompetences may create complementarities, economies of scale and make theschemes more efficient. Examples of linkages include: Yeshasvini in Indiaoutsources management functions to a TPA (see Chapter 4.6); formal insur-ance companies in many countries distribute products through communityorganizations (see Chapter 4.2); the creation of economies of scale and bar-gaining power through the grouping of microinsurance schemes, as in thecase of emerging African federations (see Chapter 4.3); and channelling sub-sidies through mutual benefit associations in Colombia (Box 11).

Functional linkages may also be established with other components ofsocial protection to improve the coherence of the national system of socialprotection. Examples of such linkages include channelling social services toeligible members and distributing social insurance (Box 12).

Box 12 Linkages in the Philippines

The Philippines Health Insurance Corporation, or PhilHealth, has a mandateto achieve universal coverage by 2012. One of the paramount challenges is toprovide health insurance coverage to workers in the informal economy,which is estimated at 19.6 to 21.7 million workers or between 70 and 78 percent of the employed population.

In response to this challenge, PhilHealth approved a resolution in 2003 toallow partnerships with organized groups on a pilot basis. The partnership,called PhilHealth Organized Group Interface (POGI), is seen as an innova-tive approach to reach out to workers in the informal economy through


Typology of microinsurance linkages

Mechanisms

– Subsidies (local, national, international)– Contracting with healthcare providers– Outsourcing management functions– Technical advice– Financial consolidation (reinsurance,

guarantee funds)– Distribution of insurance products– Distribution of public goods

(immunization, HIV/AIDS treatmentsand testing, social assistance)

– Bargaining– Exchange of information, practices– Regulation, control

Actors/partners

– Other microinsurance schemes,federations of schemes

– Civil society organizations, mutuals,MFIs, trade unions, cooperatives,associations, etc.

– Service providers, e.g. healthcare, TPAs– Private sector, pharmaceutical industry– Central and local governments– Public health programmes– Social assistance programmes, cash

transfers– Social security schemes, private or

public insurers– International cooperation

Table 6

cooperatives. The initiative is being tested with eleven cooperatives that con-duct marketing and collect premiums for PhilHealth.

Source: Adapted from GTZ-ILO-WHO, 2005.

A critical linkage to achieving social protection objectives is with health-care providers. The decentralization of the healthcare sector may facilitatecontractual arrangements between microinsurance schemes and healthcareproviders at the local level. To ensure that these relationships are mutuallybeneficial and effective, however, it may be necessary for the government tointervene (Box 13).

Box 13 Developing balanced linkages in Senegal

In Senegal, most mutual health organizations sign contractual agreementswith healthcare providers. However, the relationship is often unbalanced andthe mutual has no real means of compelling the healthcare provider to respectits commitments.

To face this problem, the Ministry of Health recognized the need todesign a national contracting policy and framework that gives guidelines andconcrete tools to facilitate the contracting process, including stages in thedesign of an agreement, minimum content of an agreement, commitments ofboth parties (including financial aspects, invoicing and payment methods),monitoring tools and procedures, and the State’s role. A working group wascreated in 2006 to design a first draft of this framework that will then be pre-sented to the relevant stakeholders for their feedback.

As illustrated in Box 11, mechanisms to redistribute subsidies can helpmicroinsurance schemes provide a minimum package of social protection topoorer households or individuals with low contributive capacity or highsocial risks (e.g. the elderly, the chronically ill, certain occupational groups).Such mechanisms provide an equitable access to social protection independ-ently of individuals’ characteristics and financial capacity. Beside their redis-tribution role, these subsidies also make the beneficiary microinsuranceschemes more attractive, which helps bolster their membership. Since redis-tribution at a national level may not be sufficient for poor countries, it is alsouseful to consider international redistribution (Box 14).

Box 14 The Global Social Trust

The mission of the Global Social Trust is to systematically reduce poverty indeveloping countries through a partnership that invests in and sponsors thedevelopment of sustainable national social protection schemes for people and


groups that have been excluded from the economic benefits of development.The basic idea is to request people in richer countries to contribute on a vol-untary basis a modest monthly amount (say 0.2 per cent of their monthlyincome) to a Global Social Trust that will be organized in the form of a global network of national trusts supported by the ILO. The Trust willinvest these resources to build up basic social protection schemes in develop-ing countries and sponsor concrete benefits for a defined period until the schemesbecome self-supporting. For more information, see: http://www.ilo.org/public/english/protection/socfas/research/global/global.htm

5.3 Integration into coherent and equitable social protection systems

Providing social security to citizens remains a central obligation of society.Through legislation and regulations, governments are responsible for ensur-ing that the public has access to a certain quality of services. This does notmean that all social security schemes have to be operated by public or semi-public institutions. Governments can delegate their responsibility to organi-zations in the public, private, cooperative and non-profit sectors.

What is needed, however, is a clear legal definition of the role of thedifferent players in the provision of social security. These roles should becomplementary, while achieving the highest possible level of protection andcoverage. For example, a social security development plan would define thescope and coverage of services through government agencies, social insur-ance, private insurers, employers and microinsurance schemes. In this con-text, governments and social partners should explicitly recognize micro-insurance as a social protection tool and integrate it into national strategies ofsocial protection, health development and poverty reduction (e.g. PRSPs inSenegal). The role of health microinsurance in an overall health financingpolicy coordinated by the State should be recognized as well. The overall aimof such a policy is universal access to healthcare based on pluralistic financingstructures (Box 15).

Box 15 Cambodia’s Master Plan

In Cambodia, the government recognizes the potential of social health insur-ance as a major healthcare financing method. To reach universal health cover-age, Cambodia’s Master Plan for Social Health Insurance recommends a par-allel and pluralistic approach which comprises: (1) compulsory social healthinsurance through a social security framework for public and private sectorworkers and their dependants, (2) voluntary insurance through the develop-ment of community-based health insurance schemes and (3) social assistance


through the use of equity funds and later government funds to purchasehealth insurance for non-economically active and indigent populations.

Source: Adapted from WHO Cambodia, 2003.

The design and adoption of appropriate legal frameworks is a key steptowards this integration. Such a framework may specify the role of micro-insurance in the social protection system and introduce a set of rules andinstitutions for the supervision of microinsurance schemes. Legislativeframeworks can contribute to the development of these schemes, althoughframeworks with high financial requirements or intensive supervision fromthe public authorities may restrain their development. To strike an appropri-ate balance, ILO/STEP is supporting the construction of a regional frame-work in eight UEMOA (Union économique et monétaire d’Afrique del’Ouest) countries to design and implement legislation to regulate mutualbenefit organizations and support their development.

For microinsurance promoters, the integration into social protection sys-tems has various implications. The benefits package that they provide shouldinclude coverage against one or more of the contingencies listed in Conven-tion 102. Moreover, when a minimum guaranteed package of social protec-tion has been defined by the legislation, these schemes should provide thiscoverage to all their members. Microinsurance schemes’ internal regulationsshould abide by the principles of equity defined by legislation (if any). Rulessuch as the exclusion of members over a certain age or calculation of premi-ums based on individuals’ risks may not be in line with such principles. Ifmicroinsurance schemes receive public financial support, they should beaccountable for the efficient use of these public funds. This implies that strictrules of management and accounting be enforced. Microinsurance schemesshould also agree that their financial statements be supervised by a public orindependent regulatory body.

More generally, it is important that promoters and operators of micro-insurance be involved – either directly or indirectly through federations rep-resenting their interests – in national consultations and negotiations with thestate and other stakeholders in the design and implementation of nationalsocial protection strategies. Such integration needs a climate of trust andconfidence between operators of schemes, networks of schemes, other civilsociety organizations representing the populations covered by these schemes(trade unions, cooperatives, etc.) and the government (Box 16).


Box 16 An integrated approach to social protection in Senegal

In Senegal, many actors have contributed to accelerate the process of extend-ing social protection, including the State, local governments, social partnersand other civil society organizations, donors and healthcare providers. Sever-al events have been significant:

– In 2003, the law on mutual health organizations was adopted; a nationalframework on the development of MHOs was created, as was the nationalcommittee on social dialogue.

– In 2004, the global campaign on social security and coverage for all waslaunched in Senegal. The trade union of transport operators included socialprotection issues in its platform. In addition, a law was adopted to designand implement a social protection scheme for rural workers (Loi d’Orien-tation Agro-Sylvo Pastorale).

These events have been integrated in the logical framework of the nationalstrategy for the extension of social protection and risk management(SNPS/GR) formulated in 2005 with the active participation of a large num-ber of players. This strategy aims at extending social protection from 20 to 50per cent of the population by 2015 through new schemes designed torespond better to the priority needs of informal-economy workers.

These events and the national strategy formulation led in 2006 to feasibil-ity studies to design and establish two nationwide social protection schemes,one for transport operators and their families (target population of 400,000people) and the other for rural workers and their families (target populationof 5 million people).

6 Conclusion

Microinsurance is one instrument which can be used to extend social protec-tion to the excluded. It is particularly relevant in situations where govern-ments lack the resources and capacity to provide social protection. Even insituations where the resources are available, if governments support micro-insurance as a social protection mechanism, like in Colombia, it may be amore efficient means of social protection than services provided entirely bythe government. For microinsurance to achieve its potential, and overcomeits limitations, it requires a dynamic, three-pronged approach, as illustratedin Figure 5:


– Bottom-up initiatives: To stimulate the grassroots development of microin-surance, it is necessary to sensitize the general public, policymakers, donorsand development agencies, as well as social partners and other social protec-tion actors, about how microinsurance works and its potential contributionto social protection.

– The development of linkages with government interventions, othermicroinsurance schemes, healthcare and other service providers, social secu-rity institutions, social assistance programmes, etc. can strengthen the sus-tainability of the schemes as well as enhance their effectiveness.

– Top-down efforts: To fulfil its social protection potential, microinsurancemust be seen by policymakers and other stakeholders within the broadercontext of coherent national social protection systems or strategies.

Figure 5 A dynamic approach to extending social protection through microinsurance

As an independent risk-management arrangement, microinsurance is notsufficient to protect poor people against risk. An integrated strategy of socialprotection should be conceived in collaboration with the government, theprivate sector, health professionals, social partners and other civil societyorganizations. Microinsurance can be most successful if it complementsother risk-management instruments on the basis of a comprehensive riskassessment.

Although the operations of microinsurance schemes are largely the sameregardless of their objectives, microinsurance schemes in the context of socialprotection should be assessed and monitored differently from microinsur-


State

Bottom-up Top-down

LinkagesLinkages

Microinsurance schemes

ance schemes for assets, livestock or housing, for example. The social protec-tion schemes have to be inclusive of high-risk or destitute members, and ide-ally access public subsidies to compensate for the higher claims or lower con-tributions. If they access public subsidies, they also have to be accountablefor them, ensuring that those funds are used efficiently and for the intendedpurposes.

The decision to implement or support microinsurance schemes is notonly driven by a risk analysis, but also by political considerations: prioritycontingencies to cover, populations to be targeted, the relevance of thismechanism as compared to others, and the possibility to link it to othermechanisms and other social protection components. The objective is toimprove efficiency, increase coverage and progressively create more coherentand equitable systems of social protection.


Part1 principlesandpractices1

Education

Transcript of Part1 principlesandpractices1